Could a Soda Tax Help Reduce the Budget Deficit?

Tucked into Wednesday's deficit-reduction plan floated by the Bipartisan Policy Center is a proposal to add a 1 cent-per-ounce federal soda tax on all soda sweetened with sugar and high fructose corn syrup (diet soda addicts caught a break as the proposal exempts saccharine- and aspartame-sweetened beverages). The BPC estimates the direct revenue gain from a soda tax would be $156 billion between 2012 and 2018. But a parallel goal of the tax is to reduce the health care costs tied to obesity.

Going to waist? It's not just our federal deficit that is getting huge. According to a recent Congressional Budget Office study, the percentage of Americans who are overweight or obese, defined as those with a body mass index (BMI) of 25 or greater, increased from 44 percent in 1987 to 63 percent in 2007. During the same stretch, the ranks of the obese, defined as those with a BMI of 30 or greater, more than doubled from 13 percent to 28 percent of the population.

The link between weight and health care costs. The CBO chart below makes a clear case that being obese has a direct impact on health care costs (an important footnote: the CBO says data for the underweight category are based on small samples and should be "interpreted with caution"). The CBO study further determined that about half of the $1,340 annual gap in health care costs between normal-weight folks and obese adults can be attributed to obesity-related diseases. And that definitely has an impact on federal spending. A 2009 New England Journal of Medicine study points out that about half of the medical costs for overweight and obese Americans are billed to Medicare and Medicaid.

Taxing consumption to lower health care costs. The NEJM soda tax study estimates that a 10 percent price increase in the cost of soda would lead to an 8-percent decrease in consumption (they also calculated that a 1 cent-per-ounce soda tax would increase the cost of a 20-ounce soda by 15 percent to 20 percent.) Proponents of a soda tax are banking on that reduced caloric intake to trigger better health, and ultimately, lower health care costs if the share of obese Americans were to shrink. The NEJM article also points out that by not taxing diet sodas, the price differential could push more people to fulfill their fix with diet sodas. As for the regressive nature of such a tax, the New York Times' David Leonhardt points out that the inflation-adjusted cost of soda has actually fallen by about one-third over the past 40 years.

An unintended consequence to consider. If a soda tax were to contribute to a decrease in the ranks of the obese, that could mean more of us end up living longer. And increased longevity can mean more medical bills since the longer you live, the more years of medical care you'll need. Indeed, the Center for Retirement Research at Boston College recently estimated that healthier people who live longer would on average have an extra $40,000 in out-of-pocket medical costs in retirement. Presumably these extra costs would also impact spending on Medicare and Medicaid, which are significant contributors to the budget deficit.